Bond markets shouldn't fear HTM cut - banks

Last Updated: Fri, Mar 08, 2013 08:43 hrs

By Suvashree Dey Choudhury and Shamik Paul

MUMBAI (Reuters) - HTM. These three letters have loomed large over Indian bond markets, but the fears may be misplaced.

Standing for held-to-maturity (HTM), it refers to a type of debt that Indian banks must hold until maturity.

Reserve Bank of India is widely expected to cut the current limit to 23 percent from 25 percent, starting early next fiscal year, to spur more lending and bolster a sluggish economy.

Indian bond investors had feared any cut in the limit would spark widespread debt sales, but bankers say that is misplaced given major lenders are already well below the existing limits after paring their holdings during a debt market rally.

Banks are also selling some of the debt held under HTM to the RBI under the open market operations, dealers say.

Major state-run lenders - the main buyers of government bonds - have already cut down their HTM holdings to 23 percent or below, according to K.R. Kamath, chairman and managing director of Punjab National Bank in Delhi.

"For PNB, our HTM holding is already below 23 percent, so there won't be any impact on our debt portfolio due to any HTM cuts," says K.R. Kamath, who is also the chairman of trade body Indian Banks' Association.

"Most banks, I think, will be in a similar position. For others at least 2 percent of the 25 percent HTM holding should be in the money," Kamath says.

Other banks that have already cut their holdings below the 25 percent limit include State Bank of India, Bank of Baroda , Canara Bank Ltd , Union Bank of India Ltd , and IDBI Bank Ltd , officials at these lenders inform Reuters.

Furthermore, RBI is looking at a gradual reduction of the HTM, spread out over several months with a series of 50 basis point cuts, say officials with direct knowledge of the matter.

The goal is to bring the HTM limit in line with the current limit of 23 percent for the statutory liquidity ratio, which includes a broader category of bonds that banks must also hold.

Bond dealers further say April or May would be the ideal time to cut the HTM ratio given the central bank's expected interest rate cuts and that banks usually reshuffle their debt portfolio at beginning of a fiscal year. (Editing by Gopakumar Warrier)

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